It’s the (Videogame) Economy, Stupid
Mar 3rd, 2010 by worldblee

While games may provide an escape from reality, the global games business is enmeshed in economic reality. A large scale, polished experience like Uncharted 2Dragon Age, or Modern Warfare 2 requires investment, which requires revenue, which requires customers willing and able to pay money. With the current generation of consoles (although more so for Xbox 360 and PS3 than for Wii), revenue has been driven by the $60 list price, roughly three times higher than that of a DVD movie and four times more than a music CD.

That price has started to creep down as publishers realize that anything other than new AAA games won’t sell at $60. EEDAR has a good newsletter on the topic of recent price trends that you can read here. The average list price on Wii is now $40 compared with $50 in 2007 (via EEDAR), which is in line with the trend for previous console systems at this point in the cycle.

However, for PS3/Xbox 360, the average game price has actually risen by 6% compared to what games cost at system launch. When you couple that with declining household income, you have a real problem. There is a long term economic shift happening before our eyes, and there is no expected result we can see that points to an upswing in improved household incomes—which leads to less disposable income available for games.

A year ago, we predicted game publishers would use the economy as an excuse to lay off workers, and this has sadly come true. We also said, “entertainment performs well in recession compared to consumer goods.” This has held true, but the drop in consumer good sales has been so steep that performing relatively well still means a drop in revenue.

This where the story gets political—or at least some will perceive it that way. Why is the world economy faltering? Is it because of drought, natural disasters, low worker productivity, strikes, or war? No. Although war and natural disasters have hit many countries, they have not affected overall output. The economy is suffering because it has been financialized, with resources diverted away from production, workers, and families to a narrow group of financial elite who gamble with the livelihoods of the rest of us.

If you’re not familiar with the concept of financialization, the following graph may help you understand the issue:

GDP share of US financial industry (via Wikipedia)

The so-called booms of the 80s, 90s, and 00 years were not fueled by a growth in consumer income, they were driven by speculative bubbles. And where does the profit from these bubbles go? Into the financial sector, as the chart shows. The most recent boom, that of housing, was fueled entirely by borrowing (for which the taxpayers picked up the tab, shoveling some $13 trillion dollars in aid, loans, and guarantees to the financial sector while the rest of us shared well under $1 trillion in bailout money). Former Assistant Treasure Secretary Paul Craig Roberts describes the issue succinctly:

Unable to maintain their accustomed living standards with income alone, Americans spent their equity in their homes and ran up credit card debts, maxing out credit cards in anticipation that rising asset prices would cover the debts. When the bubble burst, the debts strangled consumer demand, and the economy died.

It’s not a pretty statement, but it reflects the reality we face. And there are no factors lined up to improve the situation. Government spending, the only practical way to pull a country from recession or depression, is being curbed except in the case of military spending. This will likely further contract the US economy. If consumer spending, which constitutes 70% of the US economy declines, the government is the only institution capable of filling the gap. However, the US government shows no signs of investing in the consumer economy as the vast majority of its bailout money has gone to the financial sector.

So where does this economic fiasco leave the gaming business? The best, hottest games will still do well, although the prices will move downward to reflect lower household incomes. If you have a hit, it’s still a good investment to spend behind it, both in development and marketing. And the low end of the market, whether in casual games for social platforms, iPhone games, or used games, is still healthy since people still want to play games (especially if they’re free or cheap!). The economy hasn’t impacted the viability of gaming as a leisure time activity. Where the economy has hit and will continue to hit most deeply is the middle of the market, the games that are good but not driven by marketing and/or buzz to be the ‘gotta have’ games. These games are too expensive to develop for small, low overhead developers, yet they don’t produce the economic return that major publishers are looking for.

If people aren’t really excited about your game, they’re not going to buy it in droves even if you buy a Super Bowl ad. Money is too tight to splurge on titles that are not essential for your videogame library—a rental or used purchase down the line, maybe. But not an automatic purchase even if the reviews are good.

And when people buy fewer copies and/or spend less to purchase each copy of those AA games, that’s bad news for a lot of developers. We see trouble ahead for the ‘middle class’ of game franchises, developers, and publishers alike. Is it time to go big or go small—while abandoning the middle?

If so, we expect this will mean a further siphoning of jobs from the industry with publishers continuing to close developers they own to save on overhead. Continuing to roll out DLC to support existing titles could serve as a buffer for jobs, but most of that DLC will come from teams already employed on the hit games. It can keep the content teams busy while the core design teams are working on the next big iteration, but it’s not likely to serve as a panacea for creative workers.

The Recession vs. the Console Cycle
Apr 7th, 2009 by worldblee

Game publishers and developers have been laying off workers right and left. Game stocks are depressed. EA, Activision Blizzard, and THQ, among others, have announced quarterly losses. But game sales are not down—in fact, US sales were up 19% in 2008 compared to 2007.

The old adage says that entertainment performs well in recession compared to consumer goods. And it’s true. While I wouldn’t want to launch a pricey new console in today’s economy, there is a vibrant market for quality games.

Recession advertising

Recession advertising (and yeah, I am linking to a stock image)

Let’s look at our situation in 2009 compared to the environment of 2005-2006 when the Xbox 360, Sony PlayStation 3, and Nintendo Wii launched. During that period game publishers and developers faced a falling curve of demand for PlayStation 2 and Xbox titles while the market for so-called ‘next-gen’ titles had yet to materialize. That meant that R&D costs were up while revenue for titles based on that R&D investment was still low.

You’d think that the stock prices for game publishers would have been lower during that time, wouldn’t you? But if you look at the record you’ll see that companies like Electronic Arts had a robust stock price of around $60, more than three times its current price of $15-20 per share.

So what is going on?

One factor is that the large publishers haven’t created healthy studio systems on par with the Hollywood studios of days of yore. They want a large staff around when it’s time to make a hit game, but when production is done they want those costs eliminated, pronto.

And as publicly traded companies their CEOs and Boards of Directors answer to shareholders (including themselves) who want to see stocks go up, up, up. At the hint of financials that are not rising at a healthy clip—and remember that while industry numbers were up, the numbers at individual companies were not necessarily as healthy—their answer is to cut costs. Capitalism doesn’t care if profits come from rising incomes or cost cuts; profit is profit.

So that means layoffs for internal development teams and a continuing reliance on outsourcing for development. This will bring development costs down since external studios pay their workers less and offer fewer benefits than the big US publishers, especially if they’re located in countries with lower living costs and/or government tax subsidies. It also lowers fixed costs since you’re only paying people when they’re working on a project, and if the contract is milestone-based, you’re only paying if you’re getting the game you want.

This means the situation for creative workers is worse now than it was in the last platform transition even though the market for games is larger now than it was then. The economic meltdown gives game companies a plausible reason to cut their staffs while slowing salary growth or even implementing wage reduction. Because we’re at the point in the cycle were console technology is well known and game development risks are lower, publishers don’t need as much experienced talent as they would if they were preparing to launch PS4 titles. Thanks for your help; don’t let the door hit you in the ass on your way out.

This is not to trash game publishers; they’re merely acting in what they perceive are their interests. But for creative workers and for game developers it offers opportunities as well as challenges. If you’ve saved your pennies and can subsidize starting up quality IP that appeals to a sizable audience (remember the Concepticate adage of the right game with the right message for the right customer at the right time) you are in the driver’s seat, no matter what’s happening with game publisher stock prices or the overall economy. Know what your partner on the other side of the table is thinking, make sure your business case is sound, and seize your opportunity.

And should you fail, you can always go back and work for the man when the next generation of consoles comes around. This business goes in cycles and your experience will still be needed.

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